R2. Creating value in negotiation - Chapter 2.pdf

The 2 3 point range rating points signify the

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the 2-3 point range. (Rating points signify the percentage of all television households diat are watching a particular show.) Advertising revenue would likely increase by $1 million with each point increase above a 3-point rating. To evaluate the shows expected revenue to the buyer, you have es- tir:nated the likelihood of various ratings that it might receive. Your analysis appears in Table 2.1. Table 2.1 Ratíngs Likelihood Ad Revenue Generated 2-3 10% $7 million 3-4 10% $8 mi Ilion 4-5 10% $9 million 5-6 50% $10 mili ion 6-7 20% $11 million You estimate that the show willlikely receive a rating of 5-6, mak- ing it quite profitable for WCHI (even after taking into account the costs they will incur to market and run the show); thus, the station should be willing to par. you handsomely for Moms.com. The licensing CREATING VALUE IN NEGOTIATION 55 fee that you negotiate with WCHI is the primary determinant of how much you make from the sale of Moms.com. You are hoping to negoti- ate a licensing fee close to $7 mjllion for the five-year contracto While licensing fee is a salient feature of the agreement, for the deal to be finalized, you and 'the seIler must also agree on another im- portant issue: runs per episode. The shows expected revenues (as calcu- lated aboye) assume that the buyer has the right to run each of the one hundred episodes six times over the term of the contracto (Six runs per episode is thecurrent industry standard for this particular market.) However, WCHI has already alerted you that it wants the right to run each episode eight times. You want to avoid "overexposing" the show and prefer that runs per episode be limited to four. If the same episode of the show is aired too often, the residual value of the show diminishes. When the contract term ends, and the rights to Moms.com retum to HoIlyville, it wiIl be a much less valuable show if all of the episodes have alreadybeen shown many times. The financial impact of this diminishing residual value is signifi- canto Table 2.2 shows how the number of runs will affect your ex- pected revenue, from the show after the contract term ends. Your analysts project that for each additional run per episode aboye six that you allow you willlose an estimated $250,000. If you can limit the , number of runs to less than six, you can save up to $500,000. Table 2.2 Runs per Epísode Effect on Your Revenue 4 Save $500,000 ' 5 Save $250,000 6 No effect 7 Lose $250,000 8 Lose $500,000 While your goal in this negotiation is to get the best deal possible, you also want to maintain a good working relationship with WCHI because it is possible that you (HoIlyville) would do more business with the station in the near future. For example, Holiyville is very interested
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56. NEGOTlATlON GENIOS in selling a new show, Juniors, for the upcoming season. (Another Chicago station has already offered you $1 million for Juniors J how- ever, an offer you are inclined to accept.) Your assigned task in the current negotiation, then, is to structure an agreement for the sale of Moms.com that maximizes profit, pre- serves the relationship, and is superior to
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